By Jonathan M. Jacobson

Some commentators and courts have advocated or applied the so-called “tax theory” to antitrust law evaluations of bundled or loyalty discount problems. Under that approach, discounts the customer must forego if it patronizes a rival are considered a “tax” on the rival because the rival will have to offset the lost discount revenue to make the sale. Proponents view this as a type of raising rivals’ costs. This paper argues that the tax theory is misguided and should not be used. It is not raising costs because costs are not in fact raised; rather, revenues are reduced as prices must be lower to offset the lost discounts. The approach has no limiting principle, equates lower prices with competitive harm, and ultimately provides a recipe for higher prices to consumers.